Sahu et al.

, Cogent Engineering (2016), 3: 1249225

http://dx.doi.org/10.1080/23311916.2016.1249225

PRODUCTION & MANUFACTURING | RESEARCH ARTICLE

Machine economic life estimation based on
depreciation-replacement model
Atul Kumar Sahu1, Harendra Kumar Narang1, Anoop Kumar Sahu2 and Nitin Kumar Sahu3*

Received: 07 August 2016 Abstract: Decision-making is considered as the cognitive process resulting in the se-
Accepted: 13 October 2016
lection of a belief or a course of act among numerous substitute possibilities. Today,
First Published: 20 October 2016
decision-making helps to opt for the best assets i.e. machine tools, equipment etc.
*Corresponding author: Nitin Kumar
Sahu, Department of Industrial & of firms under several concerns such as depreciation value, price, replacement,
Production Engineering, Guru Ghasidas maintenance cost, repairmen cost, power consumptions etc. which augments the
Central University, Bilaspur, India
E-mail: [email protected] effectiveness of operations of production units. Recently, the problem of replace-
Reviewing editor:
ment is realized, when the job performing units such as men, machines, equipment,
Jun Guo, Wuhan University of parts etc. becomes less effective, uneconomic, useless due to breakdown, sud-
Technology, China
den failure and gradual deterioration in their efficiency by the passage of time. By
Additional information is available at replacing those assets with new ones at frequent interval, maintenance and other
the end of the article
overhead costs can be reduced. The work presented a replacement model combined
with straight-line depreciation method, which can be used to determine the eco-
nomic life of the productive machines and equipment. The proposed approach helps
the managers and the owners of the business firms in computing the economic life
of their machine. Numerical case has been presented, in order to justify the valida-
tion of the proposed model.

ABOUT THE AUTHORS PUBLIC INTEREST STATEMENT

Atul Kumar Sahu is faculty in the Department In present scenario, the world is rapidly changing
of Industrial & Production Engineering, Guru by new technologies and smart materials,
Ghasidas Vishwavidyalaya (Central), Bilaspur, India as a result new machineries are launching in
and obtained his master degree in Production every fraction of second, loaded with advance
Engineering from NIT, Rourkela. He is presently technologies and easy working mechanism. It is
working as a PhD Research scholar at NIT, Raipur. very hardship and difficult to decide, “When to
Dr Harendra Kumar Narang is faculty in the replace” existing machineries with new ones. Thus
Department of Mechanical Engineering at NIT, every business firm has to adopt certain policy
Raipur, India and obtained his PhD degree from to replace their machineries. The work suggests
Indian Institute of Technology, Roorkee, India. the policy of optimum replacement time for
Dr Anoop Kumar Sahu is faculty in the Department replacing firm assets. The work facilitates prior
of Mechanical Engineering at JK Institute of advance planning to the firms and tries to frame
Engineering, Bilaspur, India. He earned his Master the integrated relationship between depreciation
Atul Kumar Sahu Degree in Manufacturing Engineering from NIFFT, and replacement. An illustration reflecting the
Ranchi, India and obtained his PhD degree from realistic situation is presented, to demonstrate the
National Institute of Technology, Rourkela, India. usefulness of the proposed work and to make it
Nitin Kumar Sahu obtained his master degree understandable by the large group of audience.
in Production Engineering from Delhi College The manuscript will inspire, motivate and help
of Engineering, India. He is presently working other researchers in developing new models in
as a faculty in the Department of Industrial the arena of replacement, by providing an idea of
& Production Engineering, Guru Ghasidas dealing with replacement policy.
Vishwavidyalaya (Central), Bilaspur, India.

© 2016 The Author(s). This open access article is distributed under a Creative Commons Attribution
(CC-BY) 4.0 license.

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Subjects: Engineering & Technology; Engineering Management; Production Engineering;

Engineering Economics

Keywords: replacement theory; maintenance; depreciation; straight line; economic life

1. Introduction
It is a great significance to avoid the failure of a system during actual operation, when such an event
is costly or dangerous (Sheu, 1998). Machines and equipment are usually used by the manufacturers
to reproduce profit. These assets involve huge investments and have relatively longer useful life. To
stand competitive and to earn profit in the market the manufacturers should equipped with innova-
tive machines and equipment. The existing machines and equipment should be replaced at random
intervals to remain competitive. The manuscript aids the manufactures in deciding the optimal time
for replacement. The presented work chooses weighted average cost as one of the major criterion
for replacing their machines and equipment. It is a common phenomenon that the performance &
efficiency of these machines or equipment deteriorates with time. The remedy is either to replace
them with new one or to restore their efficiency by providing some sort of maintenance and repairs.
An operating system contains a replaceable unit, whose wear (accumulated amount of damage)
can be observed over time. However a stage comes, when the maintenance of existing machines or
equipment becomes so expensive, thus it is more economic to replace them. When the wear reaches
a certain level, the unit is no longer able to function satisfactorily and needs to be replaced (Kumar
& Westberg, 1997). Machines and equipment are not merely subjected to wear and tear, which is
adjusted in the form of depreciation, but they are also subjected to the risk of obsolescence. The
failure characteristics of a system may depend on the total operating time, operating conditions or
on the values of monitored variables (Allen & Ching, 2005). Due to technological developments, the
obsolescence may occur at any time in the life cycle of a machines and equipment, even few months
after the installation of the machines. The requirement for increased plant productivity, safety and
reduced maintenance costs have led to a growth in popularity of various methods to aid the plan-
ning of plant preventive maintenance and operational policies (Christer, Wang, & Sharp, 1997). It
should be noted that, if any existing equipment fail to meet the challenges made by the advance-
ments of the technological developments, it must be replaced even though it is in operating condi-
tions. Thus in such cases even though the equipment has physical value, it should be replaced, if it
loses economical value means fails to withstand competition.

The presented work highlights on determining the optimal time period, up to which a manufac-
turer can operate his machine with minimum expenditure. The presented work focuses on a time-
based replacement policy. The machine replacement is significant for maintaining the operational
efficiency, effectiveness and economic. Table 1, depicts different model representing various types
of replacement policies:

Table 1. Types of replacement models

Model Description
1 Replacement of items whose maintenance cost increases with time and the value of the money remains
constant during the period
2 Replacement of items whose maintenance cost increases with time and value of money also changes
with time
3 Group replacement policy

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2. State of art
Crowder and Lawless (2007) incorporated a random effect or frailty term, in the model for individual
degradation. They have considered costs for observing the wear on a unit, for replacing a unit, and
for allowing a unit to fail before being replaced. They suggested that when the last cost is compara-
tively large replacement before failure is preferable. Craig and Stephen (2010) considered life-cycle
assessment (LCA), as a tool to identify the environmental impact of a product or process. They com-
pare three replacement options for an aging Portland cement concrete (PCC) pavement with the use
of an LCA process-based protocol. Their objective is to remove and replace the aging pavement with
PCC pavement. Kumar and Westberg (1997) suggested a reliability based approach. They considered
values of monitored variables to estimate the optimum replacement time interval for a system or
threshold values under age replacement policy.

Sheu (1998) derived the expressions for the expected long-run cost per unit time and the total
discounted cost for each considered policy. The optimal T which minimizes the cost rate or total
discounted cost is discussed in their presented work. Alta, Pedro, and James (2015) suggested that
the performance of the system is quantified in terms of operational cost savings. Oyedepo, Fagbenle,
Adefila, and Mahbub (2015) worked on minimizing the cost, which comprises the cost associated
with the investment, operation, maintenance, and fuel cost etc. Allen and Ching (2005) demon-
strated the modeling of the machine replacement problem by renewal theory. They proposed a de-
terministic model to illustrate the concept of a machine cycle, followed by a stochastic model with a
general cost. They compare the quantity-based replacement policy and time-based replacement
policy for a single machine replacement problem. Sheu (1999) proposed a generalized replacement
model, where a deteriorating system has two types of failures. Numerical example to minimize the
expected cost rate is discussed in his work.

Chu, Proth, and Wolff (1998) considered predictive maintenance to decide, whether or not to
maintain a system according to its state. They address the case of one-unit system. They proposes
a global approach to the problem and provides a characterization of the optimal maintenance. Shey,
Griffith, and Nakagawa (1995) constructed a numerically efficient algorithm to minimize the long
run expected costs per unit time of the policy. Cardoso and Gomide (2007) suggested the use of
predictive data mining techniques, as a systematic approach to explore newspaper company data-
base and improve predictions. The focus of their work is to develop a prediction method that uses
fuzzy clustering and fuzzy rules together with performance scores of selling points for prediction.
Sahu, Sahu, and Sahu (2016, 2016b) found that uncertainty always lies in decision-making and sug-
gested to adopt proper policy in handling and managing the case. They utilized the concept of fuzzy
logic to deal with uncertainty in their work.

Christer et al. (1997) developed a replacement action decision aid for a key furnace component
subjected to condition monitoring. They suggested state space model to predict the erosion condi-
tion of the inductors in an induction furnace. Kristensen and Søllested (2004) presented a sow re-
placement model for the methodological improvements of Bayesian updating and multi-level
hierarchical Markov processes. They demonstrated the application of the model using data from two
commercial Danish sow herds and concluded that the Bayesian updating technique and the hierar-
chical structure decrease the size of the state space dramatically. They describe the optimization
model of the sow replacement model and implemented it, as a prototype for use under practical
conditions.

Tan and Raghavan (2008) developed a simple practical framework for predictive maintenance
(PDM)-based scheduling of multi-state systems (MSS). They derived maintenance schedules from a
system-perspective using the failure times of the overall system. The results of their simulation dem-
onstrate the significant impact of maintenance on quality and the criterion for the call for mainte-
nance on the system reliability and mean performance characteristics. Their studies also reveal that,
to reduce the frequency of maintenance actions, it is necessary to lower the minimum user demand
from the system. Chien, Sheu, Zhang, and Love (2006) proposed a generalized replacement policy,

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where a system is replaced at the n type I failure or first type II failure or at age T, whichever occurs
first. They obtained the expected cost rate and discussed the optimal n and optimal T which would
minimize the cost rate. There is a need to explore new multi-level hierarchical modules and indexes,
aligned with new multi decision-making criterions and methods (Sahu, Sahu, & Sahu, 2014, 2016a).
Thus the field of replacement is required to be explored in terms of building multi criteria decision-
making models and developing criterion. The multi criteria decision-making models are required to
build in future by the insertion of the replacement criterion as the chief and vital criterion. A. K. Sahu,
N. K. Sahu, and A. K. Sahu (2015), N. K. Sahu, A. K. Sahu, and A. K. Sahu (2015) discussed multi criteria
decision-making models in the ambit of decision-making and found that the criterions plays an im-
portant role in exploring the system behavior.

3. Straight-line depreciation method

Generally, there are two types of cost named as fixed cost and variable cost, which are used along
with numbers of units for determining the selling price of the product. Fixed costs are the amount
spent on purchasing fixed assets like plant and machinery etc. These fixed assets are used through-
out the operation of a business for numerous successive periods. Value of such fixed assets declined
with passage of time, due to their utilization in chains of operations. These fixed assets, which are
used for generating revenue, should assumed to be bring to its original position by replacing with
new ones after a certain period of time. Thus the portion of earned revenue should be allocated to
fulfill the capital cost of new fixed asset and is called depreciation fund or cost, which is a measure
of wear, obsolescence through technology or market change etc. Cost of depreciation usually starts,
when the assets are placed into operation or service. It affects the net total income that is reported
by the business firm and should be taken into account for determining the net profits. The earned
total revenue of the firms is required to be reduced by some amount to compute the actual profit.
The reduced amount is the cost of the machinery of equipment, that is going to be spent on purchas-
ing new machinery and equipment after passage of time. These reduced costs are not immediately
consumed in the operation or activity.

Depreciation may be defined as a decrease or decline in the value of talent or assets over time due
to wear and tear. The most frequent used method for depreciation is the straight-line method. This
method assumes that the rate of depreciation is fixed for every year. In this method the depreciation
value remains constant for every period. In this method yearly depreciation equals to a constant
fraction of the initial investment. Equation (1) is used to calculate the depreciation amount by this
method.
(C − S)
Depreciation cost per year = (1)
N
where C = Cost of equipment/capital cost, S = Scrap/salvage value of the equipment, N = Equipment
useful life. If the scrap value of the equipment is zero, then the Equation (1) can be written as:

(C − S)
Rate of depreciation =
N

Original cost
Rate of depreciation =
Useful life
This method assumes that the rate of depreciation always follows the linear relationship as the time
passes. Figure 1 depicts the depreciation slope over time.

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Figure 1. Depreciation slope by

straight line method.

4. Replacement model
The intention of the presented work is to propose an economic replacement policy with the objective
of minimizing the overall total cost. The work assists the managers and the owners of the business
firms to accomplish the objective of generating more earnings via operating the machines with mini-
mum average cost rather than operating them by higher cost. The optimal replacement policy is
decided by balancing the cost of the new machine against the decrement in efficiency and the
­increment in cost of operation and maintenance of the old equipment. In addition with that there
are several other theoretical reasons, which suggest the replacement of old assets with new one.
Figure 2 depicts the variety of reasons responsible for replacement of assets.

The optimal replacement policy is determined in terms of time period n, which reciprocates the
minimum weighted average cost for operating/running the machine. It is assumed that the assets
will be replaced at the end of year. It is very hardship and difficult to decide, at the end of which year
the existing machineries should be replaced with new ones. In the presented work, the authors sug-
gest the concept of weighted average cost (WAC) to determine the economic year for replacement
of assets. Table 2, depicts the pre-requisite needed for determining the optimal replacement
policy.

Figure 2. Reasons for

replacement.

Table 2. Data structure for replacement policy

Time 1 2 3 4 5 6 7 ... n
Operating/maintenance/running cost Rc(1) Rc(2) Rc(3) Rc(4) Rc(5) Rc(6) Rc(7) ... Rc(n)

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5. Approach and computation

In order to determine the optimal time n to replace the machine, the authors calculated the weight-
ed average cost by exploring Equation (3). The notations as shown in Table 3 are used for represent-
ing the various associated terms in the presented model. If the machine is used for n years, then the
total cost TC incurred during this period can be calculated as:

n
∑
TC = Capital cost − Resale value for t period + maintenance cost
t=0

1 n
Net present value (NPV) per rupee for nth period =
(1 + I)
where I = rate of return (Interest rate).

Total maintenance cost incurred on the machine during n year is:

n
n

∫
∑
Rc (t) × Rf (t) = Rc (t) × Rf (t)
t=0
t=0

∫
Total cost (TC) = C − Rv (t) + Rc (t) × Rf (t)
0

n
∑
Total cost (TC) = C − Rv (t) + Rc (t) × Rf (t) (2)
0

TC
Weighted average cost (WAC) = (3)
Cumulative discount rate
The time period with minimum weighted average cost will be selected for the replacement of ma-
chine. Table 4, defined various terms associated with the presented case. The replacement policy to

Table 3. Notation used

Notation Description
C Cost of equipment/capital cost
Rv(t) Resale value for period t
Rc(t) Operating/maintenance/running cost for period t
Rf(t) Discounted rate factor for period t
C - Rv(t) Depreciation
TC Total cost
WAC Weighted average cost

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Table 4. Terminologies
1. Discount rate:
a. Rate at which a bill of exchange or an accounts receivable is paid before its maturity date
b. R
 ate by which an invoice amount is reduced when a condition is complied with such as payment on
delivery
c. M
 ultiplier that converts anticipated returns from an investment project to their current market value (present
value)
d. I t is always less than 1, and depends on the cost of capital and the time interval between the investment
date and the date when return starts to flow
e. Discounted rate factor (Rf) = 1
[1+I]n

where I is the required rate of return (interest rate) and n is the number of years, also called discount factor or
present value factor

2.  Maintenance:
a. A
 ll action taken to retain materiel in or to restore it to a specified condition. It includes inspection, testing,
servicing, classification as to serviceability, repair, rebuilding and reclamation
b. All supply and repair action taken to keep force in condition to carry out its mission
c. The work of keeping something in proper condition

3.  Depreciation:
a. A
 n expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most as-
sets lose their value over time
b. A decline in the value of a given currency in comparison with other currencies

4.  Economic life
a. P
 eriod over which an asset (machine, property, computer system, etc.) is expected to be usable, with nor-
mal repairs and maintenance for the purpose it was acquired, rented or leased
b. E
 xpressed usually in number of years, process cycles or units produced. It is usually less than the asset’s
physical life
c. T
 he period of time (years) that yields the minimum equivalent uniform annual cost (EUAC) of owning and
operating as asset

5.  Net present value (NPV):

a. T
 omorrow is hidden in mystery. The money received today is greater in magnitude than the money re-
ceived tomorrow. Net present value is the present value of net cash inflows generated by a project in
future

R 1 R 2 R n
NPV = (1+I)
1
+ (1+I)
2
+ … + (1+I)
n

where I = Target rate of return per period, R1 = Net cash inflow during the first period, R2 = Net cash inflow dur-
ing the second period, Rn = Net cash inflow during the third period and so on

determine the economic life of the machine based on WAC is discussed by considering the following
steps, shown in Figure 3.

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Figure 3. Flow chart of

proposed approach.

6. Applications and implications

The main application of the presented work lies in helping the government to draft policies, which
are required to maintain ecological balance of the environment. The suggested work can act as a
tool to the government authority in tackling green environmental decisions. We are aware that
green concerns are significant and are drawing attention of the several social regulatory authorities
to devise, choose, select and study various tools, techniques and methods, which aids in controlling
environment pollution. Replacement is one of the functional area needed proper attention by the
regulatory authorities in achieving a part of the goal of maintaining global green environment. The
presented work illustrates the case of replacement of machinery of the business firms taking cost as
an objective and thus can also be implemented by the individual. Moreover the presented work also
depicts numerous reasons answerable for the replacement of assets connected to green environ-
ment concerns i.e. reduction in consumption of power or fuel by the advanced machine, Smoky,
noisy, hazardous working conditions and pollution by old machines. Machine can be defines as a
bunch of moving parts which moves to perform some task when electricity or fuel is given. It can be
automobile vehicle. Thus the presented work apart from the business firm also helps the consumer
in deciding the individual optimum replacement time of replacing their vehicle. Moreover, it will help
the government regulatory authority in sketching the green replacement models by considering the
parameter effecting pollution as cost parameters and computing the optimum replacement time.
This will aid in drafting necessary rules and regulations to be strictly followed by every individual of
the society owning productive assets, by declaring a time period to replace their vehicle or machin-
ery assets after passing it. The economist can also be facilitated by the presented work in computing
the optimum replacement period and suggesting the government to impose replacement of the
owned productive assets by the peoples of the society based on their average income, which will
boost the revenue generation (tax) and national economy by increasing the cash flow in the
market.

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7. Course of action
The considered case reflects the policy of Replacement of items whose maintenance cost increases
with time and value of money also changes with time. The quantitative solution of the presented
case is shown in Table 5, by considering the following course of action:

• The purchasing cost along with the installation charges should be considered as capital cost,
represented by C, in second column in the presented case.
• Rate of depreciation is constant, calculated by straight line method and depicted in third
column.
• Resale value, Rv(t) of the machine, depicted in fourth column and can be calculated by:

n
∑
C− Rate of depreciation
0

• Operating/maintenance/running cost as Rc(t) should be determine as per the expected expendi-

ture on the machine in future, depicted in fifth column.
• Discounted rate factor, Rf(t) is represented in sixth column and can be calculated by:

1 n
(1 + I)

• Net present value of the operating/maintenance cost that ought to be spend on the successive
years, represented in seventh column and can be calculated as:

Rc (t) × Rf (t)

• Calculate the cumulative maintenance/operating cost, shown in the eighth column by:

∑
Rc (t) × Rf (t)

• Total cost of the machine, shown in ninth column can be determine by:

∑
C − Rv (t) + Rc (t) × Rf (t)

• Calculate the cumulative discounted factor, shown in tenth column.

• Weighted average cost (WAC) should be compute, shown in eleventh column by dividing the
total cost by the cumulative discount factor.

The time period n representing the minimum WAC should be considered for replacing the
machine.

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 Table 5. Quantitative solution
Service Cost of the Depreciation Resale Operating/ Discounted Rc(t) × Rf(t) ∑ Total cost Cumulative Weighted
Sahu et al., Cogent Engineering (2016), 3: 1249225

year (N) equipment/ cost per year value Rv(t) maintenance/ rate factor Rc(t) × Rf(t) (TC) = C – Rv(t) + ∑ discount average
capital cost by straight running cost rate cost (WAC)
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Rf(t) Rc (t) × Rf(t)

(C) line method Rc (t)
1 800,000 50,000 750,000 16,000 1.0000 16,000 16,000 66,000 1 66,000
2 800,000 50,000 700,000 24,000 0.9091 21,818 37,818 137,818 1.9091 72,190.48
3 800,000 50,000 650,000 32,000 0.8264 26,446 64,264 214,264 2.7355 78,326.28
4 800,000 50,000 600,000 40,000 0.7513 30,053 97,049 297,049 3.4869 85,191.2
5 800,000 50,000 550,000 48,000 0.6830 32,785 129,834 379,834 4.1699 91,090.17
6 800,000 50,000 500,000 56,000 0.6209 34,772 164,605 464,605 4.7908 96,978.92
7 800,000 50,000 450,000 64,000 0.5645 36,126 200,732 550,732 5.3553 102,839.4
8 800,000 50,000 400,000 72,000 0.5132 36,947 237,679 637,679 5.8684 108,662.8
9 800,000 50,000 350,000 80,000 0.4665 37,321 275,000 725,000 6.3349 114,444.8
10 800,000 50,000 300,000 88,000 0.4241 37,321 312,320 812,320 6.7590 120,183.1
11 800,000 50,000 250,000 96,000 0.3855 37,012 349,332 899,332 7.1446 125,876.4
12 800,000 50,000 200,000 104,000 0.3505 36,451 385,784 985,784 7.4951 131,524.4
13 800,000 50,000 150,000 112,000 0.3186 35,687 421,470 1,071,470 7.8137 137,127.3
14 800,000 50,000 100,000 120,000 0.2897 34,760 456,230 1,156,230 8.1034 142,685.3
15 800,000 50,000 500,000 128,000 0.2633 33,706 489,937 789,937 8.3667 94,414.49
16 800,000 50,000 000000 136,000 0.2394 32,557 522,494 1,322,494 8.6061 153,669.7

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8. Problem statement
Today, in the race of generating more earnings and to remain competitive amongst rival, the deci-
sion-making is important and should be optimize. It is the task of the managers of business firms to
explore and consider various branches of science and departments of their hierarchical structure in
decision-making. Replacement of machineries and assets is a common concern in the mind of the
owner of the business firms. In the presented work, the authors considered the case of replacement
of mechanical equipment (lathe machine) with a purchase price of Rs. 800,000 and worked to ac-
complish the objective of generating more income by the way of operating the machine with mini-
mum average cost rather than running by higher yearly cost. The authors considered running costs
per year and resale values for shaping economic time period of lathe machine, So that prior advance
planning can be done by the operating firm to replace their machine.

Based on the expert assessment and market survey the authors found that the operating cost
which includes maintenance costs and running costs are found as Rs. 16,000 for the first year, which
increases by Rs. 8,000 every year. The authors also considered depreciation of machine as criteria for
modeling the replacement problem along with other parameter i.e. capital cost, operating cost, re-
sale value and the concept of value of money in contrast to future (particularly known as net present
value). The authors considered the discounted rate factor of 10% for computing the net present
value of cash in future.

The authors try to frame the integrated relationship between depreciation and replacement and
adopt straight line method of depreciation, assuming the life of the machine as 16 years. The resale
value is calculated based on the computed depreciated value. Table 6 furnished the objective infor-
mation explored by proposed mathematical model. Replacement is common problem in engineer-
ing applications and can be defined as a type of uncertain maintenance given to run a system
efficiently and effectively. Figure 4 depicts the importance of replacement action in the field of man-
agement activities.

Table 6. Objective information

Service year Cost of the Depreciation Resale value Operating/ Discounted
(N) equipment/ cost per year Rv(t) maintenance/ rate (I) (%)
capital cost by straight running cost
(C) line method Rc(t)
1 800,000 50,000 750,000 16,000 10
2 800,000 50,000 700,000 24,000 10
3 800,000 50,000 650,000 32,000 10
4 800,000 50,000 600,000 40,000 10
5 800,000 50,000 550,000 48,000 10
6 800,000 50,000 500,000 56,000 10
7 800,000 50,000 450,000 64,000 10
8 800,000 50,000 400,000 72,000 10
9 800,000 50,000 350,000 80,000 10
10 800,000 50,000 300,000 88,000 10
11 800,000 50,000 250,000 96,000 10
12 800,000 50,000 200,000 104,000 10
13 800,000 50,000 150,000 112,000 10
14 800,000 50,000 100,000 120,000 10
15 800,000 50,000 500,000 128,000 10
16 800,000 50,000 000000 136,000 10

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Figure 4. Role of replacement

in managerial hierarchical
structure.

9. Replacement and disposal

The presented work strikes on highlighting the role and importance of replacement policy by the way
of determining the most favorable replacement instant of machines. The work proposes the eco-
nomic worth of machines to firms via determining the minimum average cost of operating, but by
replacing the old machines with new one, the former have to be properly disposed, which can be the
difficult problem to be tackle in this rapidly changing world. In order to control the disposal problem
and avail benefits of smart production via replacing old machineries, the research work in the do-
main of effective and effectual disposal strategies are required to be conducted. The government
various policies of reduce–reuse-recycle-recover–dispose during various phases of the life cycle of
the equipment or machineries must be utilized. These policies are required to be strictly compelled
towards the manufacturing firms, which will help to diagnose the disposal problem up to some ex-
tent. The manufacturer and operating firms should be guided and the administrative rules are re-
quired to be stringently functional to every manufacturer, consumer or bulk consumer implicated in
manufacturing, sales, and purchase as well as involved with scrap materials, collection centers, dis-
mantlers and recyclers etc.

10. Limitations
The work shaped the economic time to replace assets and assists the business firms to accomplish
the objective of generating more earnings via operating the machines with minimum average cost
rather than operating by higher cost. The suggested replacement model is unfeasible in terms of
green issues, when deploy to select electronics equipment and machineries. Since the owner of the
firm preserve more earnings by replacing these electronics equipment and machineries with new
one at optimum time period, but this will generate E-waste, which is an emerging problem encoun-
tered by numerous countries, as E-waste contains heavy metals or chemicals such as cadmium,
chromium, lead, antimony, magnetic properties and mercury etc. Therefore it is suggested to ad-
dress and diagnose the problem of E-waste by the forthcoming researchers via developing biode-
gradable materials for the manufacturing of electronics assets or the replacement of the electronics
assets should be carried out by favoring the last usage of it until the equipment malfunction and
unattainable to repair or maintain.

11. Conclusions
In today’s competitive environment, due to fast technological development and globalization, re-
placement of machines and equipment is a permanent and complex problem, which is common
concern in the mind of the owner of the almost every business firms. The decision pertaining to re-
place machines and equipment helps in determining their economic life, so that prior advance

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planning can be done to replace their machine and can also consider the spent cost in computing
the variable cost per unit and the selling price of the produced product. The presented case favored
to replace the lathe machine at the end of first year with the minimum average operating cost of Rs.
66,000. If the manufacturer does not replaces the considered lathe machine after completing the
first year of his operation and proceeds for the second year, third year and so on, in that case the firm
operates his machine with high average cost in spite of minimum average cost, which can be easily
computed by the presented work, shown by scatter diagram in Figure 5. Scatter diagram depicts the
average yearly cost corresponding to time (years), that the business firms have to spend in subse-
quent years. Figure 6 depicts the histogram, which shows the comparison between average yearly
cost to be spent in future and the minimum yearly cost that can be achieved by the presented work.
It also depicts that how much extra amount has to be paid by the business firms in other years. The
authors would like to conclude that based on the presented work, merely due to small calculation, it
is possible by the business firms to operate the purchased machinery via determining the economic
replacement time with the minimum cost as compared with other years.

The proposed case depicts that it can be possible for a manufacturer to run their machines with
minimum cost per year by replacement analysis and can also be helpful to a manufacturer to get rid
from obsolescence due to technological developments or change that may occur at any time.
Separately from obsolescence and minimum yearly cost equipment replacement also facilitates in
producing better quality products and provides the competitor to earn more profit, increased

Figure 5. Scatter diagram.

Figure 6. Histogram.

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production, introduction of new products, safety etc. and helps in remaining competitive due to new
machines replaced. Replacement decision is not an easy job, it requires special consideration as it
involves large capital investment. A wrong decision may adversely affect the profitability of the or-
ganization, therefore a scientific approach is essential to solve these types of problems.

12. Future work

Replacement is a common concern to every business firms. The assets that an individual possess,
need replacement due to wear and tear. It is apparent that uncertainty constantly exists in practical
and real life problems. The class of researchers is concentrating on developing the methodology
related to replacement and depreciation based on objective information. Work is required to be
conducted in developing new methods and techniques in the direction of replacement and precise
computation of depreciation cost by incorporating inconsistence, vagueness, imperfect, imprecise
and uncertain information because it is not easy to obtain consistence, certain, true and precise in-
formation from the real system in the domain of replacement and depreciation. New methods and
techniques via incorporating subjective as well as subjective cum objective information need to be
developed. Work is also required to be done in the ambit of replacement by introducing new meth-
ods and developing merge concepts between breakeven analysis and replacement, queuing theory
and replacement, linear programming models and replacement, qualitative group replacement poli-
cies, simulated modeling in replacement etc.

Funding Christer, A. H., Wang, W. J., & Sharp, J. M. (1997). A state space
The authors received no direct funding for this research. condition monitoring model for furnace erosion prediction
and replacement. European Journal of Operational
Author details Research, 101, 1–14.
Atul Kumar Sahu1 http://dx.doi.org/10.1016/S0377-2217(97)00132-X
E-mail: [email protected] Chu, C., Proth, J. M., & Wolff, P. (1998). Predictive maintenance:
Harendra Kumar Narang1 The one-unit replacement model. International Journal of
Production Economics, 54, 285–295.
E-mail: [email protected]
http://dx.doi.org/10.1016/S0925-5273(98)00004-8
Anoop Kumar Sahu2
Craig, W., & Stephen, T. M. (2010). Life-cycle assessment of
E-mail: [email protected]
reconstruction options for interstate highway pavement
Nitin Kumar Sahu3 in Seattle, Washington. Journal of the Transportation
E-mail: [email protected] Research Board, 2170, 18–27.
1
Department of Mechanical Engineering, National Institute of Crowder, M., & Lawless, J. (2007). On a scheme for predictive
Technology, Raipur, India. maintenance. European Journal of Operational Research,
2
Department of Mechanical Engineering, JK Institute of 176, 1713–1722.
Engineering, Bilaspur, India. http://dx.doi.org/10.1016/j.ejor.2005.10.051
3
Department of Industrial & Production Engineering, Guru Kristensen, A. R., & Søllested, T. A. (2004). A sow replacement
Ghasidas Central University, Bilaspur, India. model using Bayesian updating in a three-level hierarchic
Markov process II. Optimization model. Livestock
Citation information Production Science, 87, 25–36.
Cite this article as: Machine economic life estimation http://dx.doi.org/10.1016/j.livprodsci.2003.07.005
based on depreciation-replacement model, Atul Kumar Kumar, D., & Westberg, U. (1997). Maintenance scheduling
Sahu, Harendra Kumar Narang, Anoop Kumar Sahu & Nitin under age replacement policy using proportional hazards
Kumar Sahu, Cogent Engineering (2016), 3: 1249225. model and TTT–Plotting. European Journal of Operational
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